The Economics of Welfare

Pigou, Arthur C.
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First Pub. Date
London: Macmillan and Co.
Pub. Date
4th edition.
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Part II, Chapter I


§ 1. IN this Part we are concerned with causes that increase or diminish the size of the national dividend by acting on the way in which the productive resources of no matter what kind belonging to the country are distributed among different uses or occupations. Throughout this discussion, except when the contrary is expressly stated, the fact that some resources are generally unemployed against the will of the owners is ignored. This does not affect the substance of the argument, while it simplifies its exposition. The purpose of this introductory chapter is to indicate the general scope of the problem before us.


§ 2. Certain optimistic followers of the classical economists have suggested that the "free play of self-interest," if only Government refrains from interference, will automatically cause the land, capital and labour of any country to be so distributed as to yield a larger output and, therefore, more economic welfare than could be attained by any arrangement other than that which comes about "naturally." Even Adam Smith himself, while making an exception in favour of State action in "erecting and maintaining certain public works and certain public institutions, which it can never be for the interests of any individual, or small number of individuals, to erect and maintain," lays it down that "any system which endeavours, either by extraordinary encouragements to draw towards a particular species of industry a greater share of the capital of the society than what would naturally go to it; or by extraordinary restraints to force from a particular species of industry some share of the capital which would otherwise be employed in it...retards, instead of accelerating, the progress of the society towards real wealth and greatness, and diminishes, instead of increasing, the real value of the annual produce of its land and labour."*1 It would, of course, be unreasonable to interpret this passage in any abstract or universal sense. Adam Smith had in mind the actual world as he knew it, with an organised system of civilised government and contract law. He would not have quarrelled with the dictum of a later economist that "the activities of man are expended along two routes, the first being directed to the production or transformation of economic goods, the second to the appropriation of goods produced by others."*2 Activities devoted to appropriation obviously do not promote production, and production would be promoted if they were diverted into the channels of industry. We must, therefore, understand him to assume the existence of laws designed, and, in the main, competent, to prevent acts of mere appropriation, such as those perpetrated by highwaymen and card-sharpers. The free play of self-interest is conceived by him to be "confined to certain directions by our general social institutions, especially the Family, Property, and the territorial State."*3 More generally, when one man obtains goods from another man, he is conceived to obtain them by the process, not of seizure, but of exchange in an open market, where the bargainers on both sides are reasonably competent and reasonably cognisant of the conditions. There is ground, however, for believing that even Adam Smith had not realised fully the extent to which the System of Natural Liberty needs to be qualified and guarded by special laws, before it will promote the most productive employment of a country's resources. It has been said by a recent writer that "the working of self-interest is generally beneficent, not because of some natural coincidence between the self-interest of each and the good of all, but because human institutions are arranged so as to compel self-interest to work in directions in which it will be beneficent."*4 Thus, though it is, apart from any institutions, to the interest of each individual that all individuals, including himself, should refrain from thieving rather than that all should thieve, it would not be to the interest of any one that he personally should refrain from thieving, unless either, by so doing, he could induce others to follow his example—which he could not do—or there was a law or other sanction imposing penalties for theft. This kind of coercive legal device for directing self-interest into social channels is well illustrated by the limitations which some civilised States impose upon the absolute powers of owners of property—such limitations as the Bavarian rule forbidding owners of forests to exclude pedestrians from their land, the French and American rules restraining a man from setting fire to his own house, and the practice prevalent in all countries of expropriating private owners where their expropriation is urgently required in the general interest.*5 It is further illustrated by the attitude of the law of modern nations towards types of contract—gambling debts, contracts in restraint of trade, agreements for contracting-out of certain legal obligations—which are deemed contrary to public policy and are, therefore, treated by the courts as void.*6 This adjustment of institutions to the end of directing self-interest into beneficial channels has been carried out in considerable detail. But even in the most advanced States there are failures and imperfections. We are not here concerned with those deficiencies of organisation which sometimes cause higher non-economic interests to be sacrificed to less important economic interests. Over and above these, there are many obstacles that prevent a community's resources from being distributed among different uses or occupations in the most effective way. The study of these constitutes our present problem. That study involves some difficult analysis. But its purpose is essentially practical. It seeks to bring into clearer light some of the ways in which it now is, or eventually may become, feasible for governments to control the play of economic forces in such wise as to promote the economic welfare, and, through that, the total welfare, of their citizens as a whole.*7

Notes for this chapter

Wealth of Nations, Book iv. chapter ix., third paragraph from the end.
Pareto, Manuale di economia politica, pp. 444-5.
Cannan, The History of Local Rates, p. 176. Cf. also Carver, Essays in Social Justice, p. 109.
Cannan, Economic Review, July 1913, p. 333.
Cf. Ely, Property and Contract, pp. 61 and 150.
Ibid. pp. 616 aud 731.
Cf. Marshall's observation: "Much remains to be done, by a careful collection of the statistics of demand and supply and a scientific interpretation of their results, in order to discover what are the limits of the work that society can with advantage do towards turning the economic actions of individuals into those channels in which they will add the most to the sum total of happiness" (Principles of Economics, p. 475).

Part II, Chapter II

End of Notes

16 of 73

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